Look at all that retail inventory: 3 ways retailers are counting what’s on the shelves
The retail sector had a turbulent quarter.
The scales tipped when the consumer giant Walmart Inc. WMT declared lackluster results on May 17, followed by Target company TGT an equally damning May 18 report that showed both companies beat Street’s revenue estimates but missed earnings per share.
Additionally, relatively smaller retailers like Kohl’s Society KSS and Ambercrombie & Fitch ANF reported earnings in line with those of the companies mentioned above, missing expectations in terms of revenue or earnings.
Revenue and EPS aside, all of these retailers have more inventory than usual – another indication of the economic downturn in the US economy.
Dick’s: +40.4% https://t.co/3372x1iy2c
—Carl Quintanilla (@carlquintanilla) May 25, 2022
What does this mean for businesses?
Inventory turnover determines how a company sells its inventory and how it compares to similar industry averages. Lower turnover indicates poor sales and excess inventory, while higher turnover suggests strong sales and less inventory.
Excess inventory chokes cash flow and also strains the organization’s assets, costing the business every day inventory sits on the shelves.
Bloomberg announced Wednesday that for investors to understand the implications of stacked inventory, they need to be familiar with what is called inventory accounting.
According to AccountingToolsthere are four methods, but only three work for retail situations:
First in, first out (FIFO)
Like the way restaurants use their inventory, the FIFO method assumes that the items bought first are also used or sold first, which means the items still in stock are the newest. This policy closely matches the actual movement of inventory in most companies and is therefore preferable simply from a theoretical point of view.
Last in, first out (LIFO)
According to the LIFO method, you assume that the items bought last are sold first, which also means that the items still in stock are the oldest. This policy does not follow the natural flow of inventory in most companies; the method is prohibited by international financial reporting standards.
Weighted average method (WAM)
Under the weighted average method, there is only one layer of inventory. Any new inventory purchase is rolled into the cost of any existing inventory to derive a new weighted average price, which is further adjusted as more inventory is purchased.